Roche Won't Buy Alexion Because Deal Is Too Expensive

BOSTON ( TheStreet) -- I have no doubt Roche ( RHHBY) has considered buying Alexion Pharmaceuticals ( ALXN) (I'm sure other large drug companies have taken an interested look as well) but an acquisition at today's lofty valuation is very hard to justify.

My prediction: No Roche-for-Alexion deal. I'm taking the other side of Jim Cramer's call.

Roche is reportedly exploring financing options for an Alexion takeout, according to Reuters and Bloomberg. The Swiss drug giant has not denied these stories, which leads Jim to believe a deal will happen, even if Alexion is overvalued.

To his credit, Jim caught on early to the incredible investment opportunity created by orphan drug companies. He's been a longtime fan of Alexion, BioMarin Pharma ( BMRN) and Vertex Pharma ( VRTX), among others -- all orphan drug stock winners. And he's right that Big Pharma has been slower to realize the value of orphan drug development, which is why catching up through M&A makes sense.

But price still matters, which is why it's hard to see the logic in Roche buying Alexion today. Spending $25-30 billion to acquire Alexion would be highly dilutive to Roche. Alexion's main drug Soliris is expected to generate about $1.5 billion this year and may reach peak sales of $3 billion to as much as $6 billion, depending on which analyst forecasts you believe.

Soliris sounds like an attractive takeover target, but the risk is too extreme when you consider Alexion is already valued at $20 billion. Today, the stock trades at more than 32 times 2014 earnings.

We've seen this story play out before when Roche went after the gene sequencing company Illumina ( ILMN). A Roche-Illumina combination made a lot of strategic sense, but Roche ultimately walked away because the nearly $7 billion price couldn't be justified financially.

If anything, an acquisition of Alexion is harder to justify from a strategic and financial perspective, Sure, Roche would like to dig into the orphan drug market, but buying Alexion would not produce much cost-saving synergies because the two companies don't have overlapping research or manufacturing capabilities.

Again, at a lower price, it would be easier for Roche to take the plunge but not at the current Alexion price tag.

Jim might be right, but only if Roche does something foolish and out of character.

If Roche really wants to get into the orphan drug business, buying Vertex would be a better fit, in my opinion. Vertex is going to dominate the cystic fibrosis treatment market for the foreseeable future, which is as big a commercial opportunity, if not larger, than anything Alexion is working on. Plus, with Vertex, Roche could also bolster its sagging hepatitis C business. A Roche acquisition of Vertex might be just as expensive as buying Alexion, but from a strategic standpoint, the former makes more sense to me.

I've already called for Vertex to buy Sarepta Therapeutics ( SRPT), so maybe that deal should happen first, before Roche steps in. Yes, I know, I'm just dreaming.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.